By Anne-Marie J. Leake, AAP, CCM
The Payments Association participants in the Center for Payments have been serving financial institutions since the mid 1970s when Direct Deposit of government payments and payroll revolutionized banking; we’ve come a long way since then as the number of industry stakeholders, visionaries, and bold ideas has increased exponentially. The push for faster payments in the U.S. gained additional momentum as the pandemic highlighted the need for immediate and reliable digital banking services for businesses and consumers.
In early 2019, the Center for Payments released its first survey results, Readiness for Faster Payments in the U.S. Eighty-five percent of institutions surveyed said that they expected demand for faster payments in one to two years, yet only thirty-four percent of institutions surveyed said they had a payments strategy in place. Those financial institutions spurred by the survey to begin creating payments strategies were better prepared to accelerate their digital payments plans when the pandemic occurred.
A follow-up poll from the Center for Payments in 2021, Payments Priorities in 2021 & Beyond, found that only 49% of participating organizations are confident their staff is knowledgeable about faster payments. Having the appropriate technology to implement faster payments was also identified as a weak spot for most financial institutions, with only 37% indicating they have the technology in place to offer faster payments products, despite respondents collectively ranking faster, real-time, or instant payments their highest priority for consumer banking as the pandemic enters a new stage.
In the second half of 2020, the Federal Reserve Banks, as part of its FedPayments Improvement initiative, commissioned a survey of more than 2,000 businesses of all sizes about their interest in and readiness for faster payments. Many businesses responded they are already using some form of faster payment, and most expect to be able to use faster payment options for a variety of use cases within the next three years.
What is the current state of the major U.S. faster payments initiatives, and how can your institution be ready to take advantage of the opportunities?
Same Day ACH
Same Day ACH is the next generation of payments processing via the Automated Clearing House network governed by Nacha, the same network through which Direct Deposit takes place. Same Day ACH became effective in 2016 to reduce the standard turnaround times of consumer and commercial credits on the ACH network from 2 days and 1 day, respectively. This innovation just marked its fifth anniversary in September 2021, and now boasts 1.2 billion payments transferring $1.5 trillion since its launch.
Every year enhancements have been made, including adding debits, expanding the hours to submit payments, and increasing the dollar limit for each payment. Nacha members approved an increase in the per-payment maximum from the current $100,000 to $1 million effective March 18, 2022. It will apply to all eligible Same Day ACH payments, including credits and debits for both businesses and consumers. This increased limit will be beneficial for many types of payments, from insurance claim payments and payroll funding to business-to-business and tax payments, and many more.
The approval for the increased dollar limit came just weeks after Same Day ACH operating hours were extended on March 19, 2021. Financial institutions now have two additional hours to initiate Same Day ACH, a change that will enable the participation of more businesses in the Mountain, Pacific, and Hawaiian time zones.
In addition to the 373 million Economic Impact Payments that were made as standard Direct Deposit payments between March 2020 and June 2021, the IRS used Same Day ACH in September 2021 to deliver over 430,000 Child Tax Credit payments. SDA has outstanding potential for further growth and customer engagement for government, commercial, and consumer payments.
Launched in 2017, the RTPnetwork from The Clearing House is a credit push-only real-time payments platform that all federally insured U.S. depository institutions are eligible to use. The RTP network gives the banking industry a modern platform for 24/7 domestic real-time payments, complete with rich data capabilities and immediate payment confirmation. The network enables instantaneous settlement and availability, so funds can be used or withdrawn as cash within seconds. Financial institutions can integrate into the RTP network directly or through third-party service providers, bankers’ banks, and corporate credit unions. This first new payment rail in the U.S. in forty years has generated tremendous industry activity over the last several years.
Jack Henry Associates’ JHA PayCenter has been offering an integration point to the RTP network to banks and credit unions since 2019. JHA PayCenter’s open infrastructure supports product development directly by financial institutions and other third-party mobile and online banking vendors that want to leverage the RTP network.
Wisconsin-based Bankers’ Bank launched a funding agent platform in June 2020 that allows community banks to manage access to the RTP network more easily by eliminating the challenges associated with managing RTP network funding. Bankers’ Bank intends to continue to develop additional services, ensuring community banks can compete with large banks and fintechs. Similarly, Corporate One and Corporate America Credit Union provide funding agent platforms on the RTP network for credit unions. Currently nearly two dozen credit unions are participating in the RTP network.
FIS announced in September 2020 the introduction of their real-time payments managed service that provides a complete turnkey service for financial institutions using FIS core banking systems to quickly and cost effectively connect to the RTP network to initiate and receive real-time transactions.
In February 2021, Early Warning Services, LLC and TCH announced that Zelle® transactions can now be cleared and settled over the RTP network. This partnership will help consumers reduce the potential for late payments by giving them more control over timing and immediate confirmation of receipt. One of the main benefits to businesses is that they will no longer need to collect bank account information, instead transacting with a customer’s email address or mobile number they used to enroll with Zelle.
FIS unveiled RealNet, a cloud-based, software-as-a-service platform that enables businesses, consumers, and governments to initiate account-to-account transactions in April 2021. RealNet, which FIS describes as a network of networks, will leverage the RTP network and Same Day ACH. To determine which network to route the transaction over, FIS has built a decision engine to identify the fastest, most cost-efficient option for a given transaction.
April also saw the announcement from Dwolla that after attempting to develop its own real-time payments application and contributing to the Fed’s Faster Payments Task Force, they have released an application programming interface (API) to enable real-time payments through the RTP network.
To support financial inclusion by bringing the benefits of real-time payments to all Americans, especially those in communities served by minority-owned depository institutions (MDIs), The Clearing House announced in May 2021 partnerships with FIS, Fiserv, and Jack Henry to jointly fund the onboarding fees for MDIs joining the RTP network.
The CEOs from twenty-three banks on the RTP network and chief executives from Jack Henry and Fiserv signed a letter dated May 5, 2021, committing to make the investments necessary to bring intelligent bill-payment capabilities to market and encouraging all depository financial institutions to join the RTP network and participate in this effort.
The Clearing House notes that financial institutions that hold 70% of demand deposit accounts now have access to real-time payments capabilities via banking technology providers connected to the RTPnetwork, including Jack Henry & Associates, FIS, Sherpa Technologies, PayFi, ACI, COCC, and other third-party banking technology providers that have implemented streamlined processes to connect their clients to the network. Common use cases include employers paying employees on demand, such as at the end of every shift; insurance companies expediting payment of claims; and merchant acquirers providing merchants the option of settlement over the RTP network, improving their cash flow.
The FedNow Service is a new instant payment capability that the Federal Reserve Banks are developing to enable financial institutions of all sizes to provide instant payment services in real time, 24/7/365. Businesses and consumers will be able to send and receive instant payments conveniently through participating financial institutions, and recipients will have full access to funds immediately. Financial institutions and their service providers will be able to use the service as a springboard to provide innovative instant payment services.
The FedNow Service will launch in 2023 and will be deployed in phases, allowing for adjustments in response to industry needs or changes in technology. The service’s features and functionality were announced in August 2020, driven by industry feedback from numerous industry stakeholder. Some of the features to be included in the initial launch are core clearing and settlement capabilities to support a range of transaction types and use cases; use of the ISO® 20022 standard to support interoperability; support for the use of service providers and correspondents; data security and fraud management tools; and a liquidity management tool that will allow participants to transfer funds to each other to support the liquidity needs of instant payments. The Bankers’ Bank funding agent platform described in connection with RTP above is anticipated to be integrated with FedNow when it becomes available.
Financial institutions are encouraged to join the FedNow Community to collaborate with industry stakeholders in providing input on service design, product development, onboarding, and more through participation in working groups. In January 2021, the Federal Reserve announced that more than 110 organizations from the FedNow Community will participate in the FedNow Pilot Program. A new FedNow Explorer site has been launched at https://explore.fednow.org/ to help all industry stakeholders stay informed and get ready.
Payments Associations provide faster payments guidance to their members through education, certification preparation, and strategic consulting. Collectively, the Payments Associations nationwide compose the Center for Payments, a joint program for the purpose of helping member financial institutions better prepare for the continued evolution in U.S. payment systems. The mission of the Center for Payments is to advance the payments industry as a united voice through market intelligence and thought leadership.
Nacha, in conjunction with the Payments Associations and the Payments Innovation Alliance, has created a Faster Payments Professional certificate program to provide payments professionals a holistic view of faster payments, including Same Day ACH and RTP standards, legal perspectives, and more.
The Payments Innovation Alliance also launched the Faster Payments Playbook in conjunction with the U.S. Faster Payments Council to help financial institutions of all sizes navigate the faster payments landscape. ICBA supports the U.S. Faster Payments Council and encourages community banks to join and actively participate. All of the Payments Associations are members of the Faster Payments Council to ensure they are fully equipped to support their member financial institutions.
Seize the Opportunities
According to the J.D. Power 2021 U.S. Retail Banking Satisfaction Study, satisfaction improved the most during the pandemic among customers who had high levels of digital engagement with banking products, but national banks are on track to surpass regional and midsize banks in overall satisfaction after achieving big gains in customer satisfaction, narrowing the gap from 17 points in 2018 to just 4 in this most recent study.
ICBA has stated that they strongly encourage community bank adoption of faster payments and development of strategic approaches to offering payments products and services to their customers. As the technological capabilities, use cases, and non-bank players multiply, it will be even more critical for community banks to have a payments strategy in place to remain competitive and capitalize on the business opportunities presented by faster payments.
NAFCU and CUNA, both members of the Fed’s Faster Payments Task Force, play a role in ensuring that credit unions are represented in real-time payment solutions. In their 2018 comment on the Federal Reserve’s proposed real-time service, NAFCU stated that “access to faster payments services could help attract new members and improve overall satisfaction with services.”
While the global pandemic has shifted faster payments offerings to be a priority for financial institutions, there is still a significant gap in staff knowledge and technical abilities to bring such products to market. With your Payments Association by your side, you have access to the most up-to-date information, education, and resources from industry experts to help you develop and execute your institution’s faster payments strategy; let them help you seize the opportunities!
To learn more about the Center for Payments and the participating payments associations, visit centerforpayments.org. Please contact us at email@example.com and follow us on Twitter (@Center4Payments) and LinkedIn (https://www.linkedin.com/company/center4payments).